What automotive segments are attractive to investors?

May 26, 2021

by a searcher from London Business School in Union City, CA, USA

I recently came across the concept of search funds and see it potentially as a means for me to follow my mission. I am very passionate about making an impact in the automotive industry through ETA, as I see so many opportunities to improve, but have always struggled to figure out where the capital would come from. Now that I have found search funds as a potential option, especially for someone in my position (early 2022 MBA graduate), I have dug in and see serious consistency throughout investment criteria.

With that in mind, I looking at a variety of different automotive industry subsegments, and could use some inspiration for what makes an attractive investment to search fund investors within the automotive industry. What sort of companies in automotive fit typical investment criteria (recurring revenue, fragmented, growing) or could I drop one of those criteria to do what I do best with automotive services and generate higher returns?

Reply by a searcher
in New York, NY, USA

I would encourage you to look around the space with an open mind, but here are a few considerations that come to my mind. Unfortunately they're focused more on what is not a good idea vs what is, but hopefully it's helpful.

(1) in the auto industry, anything on the supplier side is inherently concentrated and wouldn't be appealing from a 'stability of revenue' standpoint due to the cyclicality of vehicle sales over time.

(2) From an ETA perspective you're better suited looking at service-oriented businesses or consumable consumer-oriented products because you want recurring revenue.

(3) The ESG concerns (I know, I know) for much of the consumable product means it's more difficult to underwrite, because you're servicing an ICE market that may not exist in ten years on an OEM basis. So as an investor, I would be concerned if you brought me something like a quick lube/oil change shop or an aftermarket catalytic converter manufacturer. Conversely, until we have flying cars a business addressing tires will continue to be in-demand.

Reply by a searcher
from The University of Michigan in Ann Arbor, MI, USA

Adding to the comments above. I have seen some interesting aftermarket business models that provide strong recurring revenue and good profits. Supplying products directly for new car production is a difficult business model with many competitors all fighting to provide the same commodity products (often at a loss upfront). That said, there is a massive ocean of cash involved in the production of new vehicles and there are some very attractive businesses service segments that engage with those product suppliers.

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